Is College Tuition the Next Bubble?

March 24, 2012

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The second part of the problem is that while a traditional liberal arts education may be able to teach a student how to live, it often doesn't do as well when it comes to teaching them how to make a living (unless there's a few million in a trust fund). A study recently released by Young Invincibles, a nonprofit advocacy group for young adults, found that almost two-thirds of U.S. student-loan borrowers did not understand at least some elements of their loans or the student-loan process. About 20 percent of the respondents, who had an average of $76,000 in student debt, reported that the size of their monthly payments was a surprise. Granted this is not about the nuances of how to live well—it's a question of how to get by, and it's fair to say that those folks weren't too well prepared for that.

They are also not too well prepared for making a living. A 2010 GAO report criticized the high-pressure sales tactics, lack of job placement, and student loan abuses found at many online and for-profit colleges. To qualify their students for federal loans and other benefits under Title IV (which is the provision of the Higher Education Act of 1965 under which most government-backed student loans are made), educational institutions must show that their programs offer "Preparation for Gainful Employment." The rules require measurement of criteria such as how many students from a given school are delinquent in loan repayments, job placement success, annual gross and discretionary income of the former students once they've entered the workforce, and so on. Bear in mind that some for-profit schools have literally hundreds of thousands of students, and derive as much as 90% of their gross tuition revenue from Title IV financing.

The underlying cause of this proliferation of big-box education is the rapidly accelerating cost of higher education in America. According to the College Board, average inflation-adjusted tuition at public four-year colleges rose by 29% in the last 10 years; the increase at private four-year colleges was 22% during the same period. In other words, the price of a college education is rising at more than double the rate of inflation.

That said, has the value of a college education increased commensurately?

And, as prices have risen, so have student loan defaults. According to the U.S. Department of Education, the default rate rose from 7 percent in fiscal year 2008 to 8.8 percent in fiscal year 2009. Defaults increased in all sectors — from 6 percent to 7.2 percent for public institutions, from 4 percent to 4.6 percent for private institutions and from 11.6 percent to 15 percent at for-profit schools.